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Tuesday, April 21, 2009

Lets Keep 2 eyes on Gold(GLD) and Silver(SLV) Etfs

Gold exchange traded funds (ETFs) are continuing to appeal to investors, and this attraction appears to be growing as we get deeper into earnings season and more economic numbers are poised to be released. What’s the connection?

As of Tuesday, gold is up because of a light spending spree after worries over the health of the U.S. banking sector dragged down equities and enhanced gold’s safe-haven appeal.

  • A weakening dollar would appear to support an uptrend in gold prices, but the opposite is not always true. Just because the dollar is strong does not mean prices will stop appreciating. In the current rally, gold prices have sustained even though the traditional drivers haven’t supported it.
  • In Barclay’s view, prices are likely to make a sustained move above $1,000 in the second half of the year.
  • Investors buy gold for a range of reasons: a dollar hedge, an equity hedge, a volatility hedge, inflation hedge and as a safe haven.
  • Mine supply is stabilizing and jewelry demand is weakening; offsetting that is a wave of investment demand.
  • Silver’s uptrend has been fueled by gold’s gains instead of it’s own fundamentals. Current levels imply that silver is undervalued, while gold is overvalued. Dorothy Kosich for MineWeb reports that Silver enjoyed a strong run last month which saw the metal’s price rise 16% compared to gold’s 11% rise.
  • The fundamental outlook for silver has deteriorated, and Cooper says the underlying supply and demand outlook for silver remains unfavorable. The mine supply is set to grow.
  • Cooper expects palladium’s fundamentals to remain weak because of a low demand outlook (the metals is primarily used in gas vehicles, and the United States is a key market).
  • Platinum’s (PGM) outlook also remains dim, Cooper says, as most of the demand is centered around the auto industry, which is in dire straits right now.

Alix Steel for TheStreet notes that this could continue as earnings season delivers some more disappointing results. Add to that some more weak economic data and rising unemployment, and it could send more people back into safe havens.

Two catalysts to watch for are the Federal Reserve’s market commentary, which will be released next week, and first-quarter GDP numbers.

The upward momentum is still keeping traders guessing and this kept the price of gold capped at $890 per ounce, possibly waiting and watching to see how the equities markets will react. Risa Maseda for Reuters reports that holdings at the world’s largest gold-backed exchange-traded fund, SPDR Gold Shares (GLD) remained unchanged on Monday.

Despite the slight rally, gold has been unable to penetrate the $900 per ounce mark, primarily because of waning demand from the industry and jewelry dealers. Silver(SLV) is up 2.3%, or 30 cents, to $12.11 per ounce as of Monday.

Disclosure I am long GLD and SLV.

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